Nikkei, Euro Stoxx Could See Further Downside

The steepness of this drop has caused some significant technical damage that suggests further downside should be seen.

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The Nikkei 225 Index (INDEXNIKKEI:NI225) saw further breakdown into the end of last week. The move confirmed, based on Elliott Wave analysis, that the index was indeed in a c-wave already.

Currently, price is sitting right at the 1.00 extension of the a-wave, and just slightly below pinball support for a wave 4. If price is going to turn back up in a wave 5, it needs to do so right here, since a drop below 14,845 would enter into wave 1 price territory, and invalidate a standard impulse.

However, the steepness of this drop has caused some significant technical damage that suggests further downside should be seen rather than being supportive of a c-wave. Therefore, unless support right here holds, and I see a clean micro impulse off the low, I am going to expect further downside this week before a corrective bounce.

The next support region below is between 14,630-14,400. It is possible price extends past this region depending on the strength behind this drop, but probabilities favor it holding for at least some sort of corrective bounce. Under the red count, a bounce from that region would likely be a B-wave, and should bring price back to the 15,100 area, which is now resistance, before setting up a C-wave down.

Looking at the Euro Stoxx 50, after last week's substantial sell-off, we have the potential for a significant top in place. However, the December 2013 low needs to be taken out first with gusto to more confidently suggest this. Otherwise, one more wave 4 and 5 is possible, similar to the DAX (INDEXDB:DAX).

This scenario is labeled on the chart in red, and would suggest that price is completing wave c of a shortly, which should lead to a b-wave bounce back to roughly 3080 before dropping again in a c-wave to complete 4. Otherwise, if the bounce seen once this current drop pauses is weak and short-lived, then it is more likely to be a wave (iv) under the blue count. Under that count, it should be followed by a new low in wave (v), completing a full impulse off the high last week, and strongly suggesting a more significant top in place.

Garrett Patten is a technical analyst and chief educator for ElliottWaveTrader.net, a live trading room featuring Elliott Wave analysis on market indices and stocks. Mr. Patten's focus is primarily on U.S. and international equity indices, and demonstrating the capabilities of unconventional technical analysis. His articles appear on sites including MarketWatch and SeekingAlpha.